MARKET WATCH: Crude rebounds above $131/bbl

A strong gasoline market caused crude to rebound above $131/bbl May 28 in the New York market, despite a stronger dollar and indications of declining demand.

Sam Fletcher
Senior Writer

HOUSTON, May 29 -- A strong gasoline market caused crude to rebound above $131/bbl May 28 in the New York market, despite a stronger dollar and indications of declining demand.

"Higher prices are causing demand destruction, but only in regions where consumers see price signals," said Richard Berner, co-head of global economics at Morgan Stanley & Co., in a May 29 report. Demand for crude within the Organization for Economic Cooperation and Development in 2008 is expected to decline for the third year in a row, although perhaps by less than 1 million b/d. However, Berner said non-OECD demand led by China and the Middle East is likely to remain strong even if oil hits $150/bbl.

Analysts in the Houston office of Raymond James & Associates Inc. said, "With a mixed bag of data points being released recently, crude continues to look disheveled as it tries to find its path. Yesterday, warnings of impending attacks by the rebel group…in Nigeria helped prop up oil prices. However, news this morning that the UAE stands ready to increase production to meet demand, as well as continuing worries about the US economy are putting downward pressure on the commodity."

The rebel Movement for the Emancipation of the Niger Delta has threatened more attacks on oil operations in Nigeria to mark President Umaru Yar'Adua's first full year in office. The UAE, third-largest producer in the Organization of Petroleum Exporting Countries, said it would increase production if required by the market. However, skeptics note that Saudi Arabia's promised 300,000 b/d increase has not reduced oil prices.

Olivier Jakob at Petromatrix, Zug, Switzerland, claimed the oil market's rebound was not the result of rebel threats in Nigeria. "The rally had started much earlier with a picture-perfect technical buying pattern," he said. "So far this year the uptrend in [crude prices] did not allow profit-taking retracements to exceed $10/bbl, and this time around was no exception. Pension funds are not yet done with their buying on commodities, and this will continue to provide strong support on retracements."

As oil prices on both sides of the Atlantic declined in early trading May 29, analysts at Pritchard Capital Partners LLC, New Orleans, noted that the market may be following the same pattern as in late April when crude prices hit record highs, retreated by $8/bbl, then soon rallied to record highs.

Meanwhile, Mexico said its oil production declined for the third consecutive month in April to a 9-year low, threatening its 2008 production target of 3 million b/d. Production was down 9% in the first quarter, with exports declining 13% compared with the same period in 2007. Of the country's active oil fields, 83% are reported to be in decline or about to reach peak production.

US inventories
The Energy Information Administration said May 29 that commercial US crude inventories fell 8.8 million bbl to 311.6 million bbl in the week ended May 23. That far surpassed Wall Street analysts' consensus of a 200,000 bbl draw. EIA said the drop was due to temporary delays in oil tanker off-loadings on the Gulf Coast. Total imports of crude into the US fell by 278,000 b/d to 9 million b/d during that week.

In the same period, gasoline stocks fell 3.2 million bbl to 206.2 million bbl, vs. an expected decline of 100,000 bbl. Distillate fuel inventories increased by 1.6 million bbl to 109.4 million bbl, compared with a consensus increase of 900,000 bbl. Propane and propylene inventories increased by 1.7 million bbl to 35.7 million bbl.

Input of crude into the US refining system increased by 214,000 b/d to 15.3 million b/d, with refineries operating at 87.9% of capacity. Gasoline production increased to 9.1 million b/d, while distillate fuel production declined to 4.3 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Although refined product inventories (gasoline, distillate, and jet fuel) are now in-line with the 5-year average for this calendar week, we remain concerned that this positive development has only occurred because of reduced supply, and that refiners are likely to ramp up production in the coming weeks due to the recent gains in refining margins. A sustained improvement in the sector is unlikely to occur absent an increase in demand, which is unlikely with crude oil prices at these levels."

Energy prices
The July contract for benchmark US sweet, light crudes regained $2.18 to $131.03/bbl May 28 on the New York Mercantile Exchange. The August contract rebounded by $2.05 to $130.99/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.19 to $131.04/bbl. Heating oil for June delivery rose 2.51¢ to $3.82/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) gained 6.46¢ to $3.45/gal.

The June natural gas contract escalated by 11.5¢ to $11.92/MMbtu on NYMEX in another failed run at the $12 level. On the US spot market, gas at Henry Hub, La., dropped 23.5¢ to $11.61/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased $2.62 to $130.93/bbl. The June gas oil contract dropped $13.75 to $1,245/tonne.

The average price for OPEC's basket of 13 reference crudes lost $2.86 to $123.05/bbl on May 28.

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